Justem's (KOSDAQ:417840) Returns On Capital Tell Us There Is Reason To Feel Uneasy

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Justem (KOSDAQ:417840), we weren't too hopeful.

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What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Justem is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.024 = ₩1.2b ÷ (₩80b - ₩29b) (Based on the trailing twelve months to March 2025).

So, Justem has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 6.0%.

View our latest analysis for Justem

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Justem has performed in the past in other metrics, you can view this free graph of Justem's past earnings, revenue and cash flow.

What Does the ROCE Trend For Justem Tell Us?

The trend of returns that Justem is generating are raising some concerns. To be more specific, today's ROCE was 7.7% two years ago but has since fallen to 2.4%. In addition to that, Justem is now employing 22% less capital than it was two years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Justem's current liabilities have increased over the last two years to 36% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.4%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

To see Justem reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 28% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Justem, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Justem may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.